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The recent implosion of crypto firm FTX and its affiliates provides a
case study for potential crypto exposure under traditional
insurance policies in this series of four articles: Silent Crypto for D&O and Corporate Liability
Insurance (Part I), Silent Crypto Exposure for Accountants (Part
II), Silent Crypto Exposure for Lawyers (Part III),
and Crime and Custody Coverage for Crypto Assets (Part IV).
Silent Crypto Exposure for Lawyers
Like other professional services providers, lawyers are not
immune from potential liability exposure in connection with
providing legal advice and services to crypto firms as the
regulatory landscape continues to evolve in a choppy and uncertain
fashion. Indeed, more firms and participants in the burgeoning
ecosystem for blockchain, cryptocurrency and digital assets are
engaging lawyers as a hedge against their own potential liability
exposure as it becomes increasingly clear that there will be
greater regulatory oversight and scrutiny of crypto firms doing
business in the United States and abroad.
Many law firms purchase Lawyers Professional Liability (LPL)
insurance policies, which typically afford coverage for claims
first made against attorneys in rendering professional legal
services to clients for a fee. These claims frequently are brought
by the law firms’ clients in the form of a legal malpractice
lawsuit alleging negligence, errors or omissions in rendering (or
failing to render) appropriate legal services or advice. Carriers
issue policies based on the area of law in which the applicant
attorney typically practices, which may be broad, but all policies
contain exclusions that must be reviewed. Attorneys may purchase
LPL policies that afford expanded coverage for legal services
provided by lawyers acting in a fiduciary capacity or providing
investment advice. This is particularly noteworthy where the lines
of law, business, finance and investments may blur.
The insurance market also offers a specialized product known as
Employed Lawyers coverage, which is typically added by endorsement
to corporate D&O policies or Management Liability Insurance
policies. This coverage is intended to insure the acts, errors or
omissions of in-house corporate counsel – but solely in
connection with rendering legal services in their capacity as an
employee of the insured organization.
Recent events in the crypto markets, including the fall of the
fourth-largest crypto exchange, FTX, highlight the various
unresolved legal issues that can trip up attorneys who provide
advice to individuals or entities engaged in creating, buying,
selling, trading, lending, retaining custody or other transactions
involving cryptocurrency or digital assets.
Some legal issues that have caught crypto firms and their
lawyers off guard include:
- Appropriate legal structure of the entity
- Where the entity should be domiciled
- Constantly evolving global regulatory landscape for crypto
firms and digital assets - Whether the firm should be registered or licensed to transact
business in different jurisdictions - Whether the firm is subject to oversight by the Securities and
Exchange Commission (SEC) for dealing in
“securities” - Whether the firm is subject to oversight by the Commodity
Futures Trading Commission (CFTC) for dealing in
“commodities” - Whether the firm is a “money services business”
- Whether the firm is subject to the Bank Secrecy Act and
anti–money laundering laws - Whether the firm’s customer Terms of Service are
appropriate and being followed - Tax treatment for cryptocurrencies and digital assets
- The attorney’s personal interest in the firm as an
investor, shareholder or stakeholder - Whether attorneys have appropriately (or correctly) advised
individual directors or officers about potential personal
exposure.
Lawyers who intend to provide such advice should be careful to
set client expectations in this uncertain and largely untested
legal environment for crypto firms, keep abreast of new
developments, and recalibrate legal advice and recommendations as
the regulatory landscape evolves.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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